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English (U.S.)
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Topic:
Economics
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2–3 pages
Details: Suppose that two people, Michelle and James each live alone in an isolated region. They each have the same resources available, and they grow potatoes and raise chickens. If Michelle devotes all her resources to growing potatoes, she can raise 200 pounds of potatoes per year. If she devotes all her resources to raising chickens, she can raise 50 chickens per year. (If she apportions some resources to each, then she can produce any linear combination of chickens and potatoes that lies between those extreme points. If James devotes all his resources to growing potatoes, he can raise 80 pounds of potatoes per year. If he devotes all his resources to raising chickens, he can raise 40 chickens per year. (If he apportions some resources to each, then he can produce any linear combination of chickens and potatoes that lies between those extreme points.)
Potatoes
Chickens
Michelle
200 Potatoes
50 Chickens
James
80 Potatoes
40 Chickens
What is Michelle's opportunity cost of producing potatoes?
What is Michelle's opportunity cost of producing chickens?
What is James' opportunity cost of producing potatoes?
What is James' opportunity cost of producing chickens?
Which person has an absolute advantage in which activities?
Which person has a comparative?
Suppose that they are thinking of each specializing completely in the area in which they have a comparative advantage, and then trading at a rate of 2.5 pounds of potatoes for 1 chicken, would they each be better off? Explain.
How would you extend the above narrative to businesses, society as a whole or nations? Explain.
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Essay Sample Content Preview:
Running head: ECONOMICS
Economics
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Economics
Opportunity cost is the cost of the next best alternative that must be forgone so as to pursue a particular action. It is similar to giving up the next best opportunity after making a decision or a choice. For example, a farmer who decides to grow tomatoes, his opportunity cost is the different or alternative crop he could have grown such potatoes, carrots, pumpkins etc. Michelle’s opportunity cost of producing potatoes is the 50 chickens that she will have to give up (James, 2003). Secondly, if she decides to produce chickens only, her opportunity cost will be the 200 pounds of potatoes she will give up. On the other hand, James’ opportunity cost of producing potatoes is equal to 40 chickens that he will forego. Moreover, his opportunity cost of producing chickens is the 80 pounds of potatoes that he will miss to produce.
A person has an absolute advantage over another individual if he can produce more goods with the same or equal amounts of resources, or can produce same amounts or products with lesser resource. The concept of specializations enables individuals to benefit from trade irrespective of the advantage they process. A person has comparative advantage in the production of goods if he can produce them at a lower opportunity cost than his partner. Michelle has an absolute advantage in the production of both chicken and potatoes. James has a comparative advantage in the production of chickens while Michelle has a comparative advantage in the production of potatoes (James,...
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